Statements of Accounting Standards (AS 1)
Disclosure of Accounting Policies
The following is the text of the Accounting Standard (AS) 1
issued by the Accounting Standards Board, the Institute of
Chartered Accountants of India on 'Disclosure of
Accounting Policies'. The Standard deals with the
disclosure of significant accounting policies followed in
preparing and presenting financial statements.
In the initial years, this accounting standard will be
recommendatory in character. During this period, this
standard is recommended for use by companies listed on a
recognised stock exchange and other large commercial,
industrial and business enterprises in the public and
private sectors.
Introduction
1. This statement deals with the disclosure of significant
accounting policies followed in preparing and presenting
financial statements.
2. The view presented in the financial statements of an
enterprise of its state of affairs and of the profit or loss
can be significantly affected by the accounting policies
followed in the preparation and presentation of the
financial statements. The accounting policies followed
vary from enterprise to enterprise. Disclosure of
significant accounting policies followed is necessary if
the view presented is to be properly appreciated.
3. The disclosure of some of the accounting policies
followed in the preparation and presentation of the
financial statements is required by law in some cases.
4. The Institute of Chartered Accountants of India has, in
Statements issued by it, recommended the disclosure of
certain accounting policies, e.g., translation policies in
respect of foreign currency items.
5.
In recent years, a few enterprises in India have
adopted the practice of including in their annual reports
to shareholders a separate statement of accounting
policies followed in preparing and presenting the
financial statements.
6.
In general, however, accounting policies are not at
present regularly and fully disclosed in all financial
statements. Many enterprises include in the Notes on
the Accounts, descriptions of some of the significant
accounting policies. But the nature and degree of
disclosure vary considerably between the corporate and
the non-corporate sectors and between units in the
same sector.
7.
Even among the few enterprises that presently include
in their annual reports a separate statement of
accounting policies, considerable variation exists. The
statement of accounting policies forms part of accounts
in some cases while in others it is given as
supplementary information.
8.
The purpose of this Statement is to promote better
understanding of financial statements by establishing
through an accounting standard the disclosure of
significant accounting policies and the manner in which
accounting policies are disclosed in the financial
statements. Such disclosure would also facilitate a more
meaningful comparison between financial statements of
different enterprises.
Explanation
Fundamental Accounting Assumptions
9.
Certain fundamental accounting assumptions underlie
the
preparation
and
presentation
of
financial
statements. They are usually not specifically stated
because their acceptance and use are assumed.
Disclosure is necessary if they are not followed.
10. The following have been generally
fundamental accounting assumptions:—
accepted
as
a. Going Concern
The enterprise is normally viewed as a going concern,
that is, as continuing in operation for the foreseeable
future. It is assumed that the enterprise has neither the
intention nor the necessity of liquidation or of curtailing
materially the scale of the operations.
b. Consistency
It is assumed that accounting policies are consistent
from one period to another.
c. Accrual
Revenues and costs are accrued, that is, recognised as
they are earned or incurred (and not as money is
received or paid) and recorded in the financial
statements of the periods to which they relate. (The
considerations affecting the process of matching costs
with revenues under the accrual assumption are not
dealt with in this Statement.)
Nature of Accounting Policies
11. The accounting policies refer to the specific
accounting principles and the methods of applying those
principles adopted by the enterprise in the preparation
and presentation of financial statements.
12. There is no single list of accounting policies which are
applicable
to
all
circumstances.
The
differing
circumstances in which enterprises operate in a
situation of diverse and complex economic activity make
alternative accounting principles and methods of
applying those principles acceptable. The choice of the
appropriate accounting principles and the methods of
applying those principles in the specific circumstances of
each enterprise calls for considerable judgement by the
management of the enterprise.
13. The various statements of the Institute of Chartered
Accountants of India combined with the efforts of
government and other regulatory agencies and
progressive managements have reduced in recent years
the number of acceptable alternatives particularly in the
case of corporate enterprises. While continuing efforts
in this regard in future are likely to reduce the number
still further, the availability of alternative accounting
principles and methods of applying those principles is
not likely to be eliminated altogether in view of the
differing circumstances faced by the enterprises.
Areas in Which
Encountered
Differing
Accounting
Policies
are
14. The following are examples of the areas in which
different accounting policies may be adopted by
different enterprises.

Methods of depreciation, depletion and amortisation

Treatment of expenditure during construction

Conversion or translation of foreign currency items

Valuation of inventories

Treatment of goodwill

Valuation of investments

Treatment of retirement benefits

Recognition of profit on long-term contracts

Valuation of fixed assets

Treatment of contingent liabilities.
15. The above list of examples is not intended to be
exhaustive.
Considerations in the Selection of Accounting Policies
16. The primary consideration in the selection of
accounting policies by an enterprise is that the financial
statements prepared and presented on the basis of such
accounting policies should represent a true and fair view
of the state of affairs of the enterprise as at the balance
sheet date and of the profit or loss for the period ended
on that date.
17. For this purpose, the major considerations governing
the selection and application of accounting policies
are:—
a. Prudence
In view of the uncertainty attached to future events,
profits are not anticipated but recognised only when
realised though not necessarily in cash. Provision is
made for all known liabilities and losses even though the
amount cannot be determined with certainty and
represents only a best estimate in the light of available
information.
b. Substance over Form
The accounting treatment and presentation in financial
statements of transactions and events should be
governed by their substance and not merely by the legal
form.
c. Materiality
Financial statements should disclose all "material" items,
i.e. items the knowledge of which might influence the
decisions of the user of the financial statements.
Disclosure of Accounting Policies
18. To
ensure
proper
understanding
of
financial
statements, it is necessary that all significant accounting
policies adopted in the preparation and presentation of
financial statements should be disclosed.
19. Such disclosure should form part of the financial
statements.
20 It would be helpful to the reader of financial statements
if they are all disclosed as such in one place instead of
being scattered over several statements, schedules and
notes.
21. Examples of matters in respect of which disclosure of
accounting policies adopted will be required are
contained in paragraph 14. This list of examples is not,
however, intended to be exhaustive.
22. Any change in an accounting policy which has a
material effect should be disclosed. The amount by
which any item in the financial statements is affected by
such change should also be disclosed to the extent
ascertainable. Where such amount is not ascertainable,
wholly or in part, the fact should be indicated. If a
change is made in the accounting policies which has no
material effect on the financial statements for the
current period but which is reasonably expected to have
a material effect in later periods, the fact of such change
should be appropriately disclosed in the period in which
the change is adopted.
23. Disclosure of accounting policies or of changes therein
cannot remedy a wrong or inappropriate treatment of
the item in the accounts.
ACCOUNTING STANDARD
(The Accounting Standard comprises paragraphs 24–27 of
this Statement. The Standard should be read in the
context of paragraphs 1–23 of this Statement and of the
'Preface to the Statements of Accounting Standards'.)
24. All significant accounting policies adopted in the
preparation and presentation of financial statements
should be disclosed.
25. The disclosure of the significant accounting policies as
such should form part of the financial statements and
the significant accounting policies should normally be
disclosed in one place.
26. Any change in the accounting policies which has a
material effect in the current period or which is
reasonably expected to have a material effect in later
periods should be disclosed. In the case of a change in
accounting policies which has a material effect in the
current period, the amount by which any item in the
financial statements is affected by such change should
also be disclosed to the extent ascertainable. Where
such amount is not ascertainable, wholly or in part, the
fact should be indicated.
27. If the fundamental accounting assumptions, viz. Going
Concern, Consistency and Accrual are followed in
financial statements, specific disclosure is not required.
If a fundamental accounting assumption is not followed,
the fact should be disclosed.